THE BREAKFAST BRIEFING

This summer has offered an old-fashioned stock picker a chance to shine.

Correlation among the 10 large-cap sectors in the S&P 500 – their tendency to move in unison regardless of their underlying fundamentals – fell to 69.9% last month, the lowest level in two years, according to Nicholas Colas, chief market strategist at ConvergEx Group. In the prior month, this figure clocked in at 89%.

That means fundamentals, as opposed to macro developments, are now playing a bigger role in how individual stocks and sectors trade, a stark contrast to what predominately transpired dating back to the financial crisis.

“If you are a stock picker, then it’s basically now or never for whatever investment discipline you might follow,” Mr. Colas said in a note to clients, while pointing out correlations have “taken a surprising nosedive in recent weeks.”

The latest pattern suggests much of the risk-on, risk-off trading that dominated markets over the past few years has diminished, which has put company-specific news more in focus. There are a few reasons for the latest trend. Investors are now picking winners and losers based on corporate fundamentals ahead of the Fed’s eventual curtailing of its bond-buying program, Mr. Colas says. A steady stream of cash flowing into stock funds is also helping fund managers put more money to work as opposed to utilizing “passive investment vehicles,” he added.

What’s more, broad-market trends have taken a backseat in recent weeks to individual stocks that have dominated trading volumes. As investors wait for the Fed to make a move, they’re focusing more on three themes: activist investors agitating for change – J.C. Penney Corp. and Herbalife Ltd. – struggling tech stocks that are bouncing back – Facebook Inc. and Apple – and high-flying companies that can do little wrong right now – Tesla Motors Inc.

Lower correlations also coincided with an overall market that continues to hover around record highs. Despite wobbling in recent days, the S&P 500 is still up 0.5% this month and 19% for the year.

“Investors might be overly focused on stock picking and have begun to ignore broader influences such as Fed policy, market valuation, European growth trends, economic surprise indices and the like,” Tobias Levkovich, chief U.S. equity strategist at Citigroup, warned clients earlier this month. “Very high readings on intra-stock correlation tend to generate an intriguing buy signal as seen in September 2011, while low levels suggest a degree of complacency that puts fund managers at risk for a correction.”

Even Mr. Colas himself said he wants to see more months similar to the last one before signaling this trend is here to stay.

“It could all just be a fluke,” Mr. Colas said. “We’ve had plenty of head fakes of various types in the last five years which seemed to portend a return to more normal macroeconomic and market routines. While the data is very welcome, it would be wise to take it with a grain of salt until we see these trends hold.”

But assuming low correlations become the new norm, Mr. Colas would welcome such an environment with open arms.

“We’ve been tracking this data since the financial crisis, waiting for this moment,” Mr. Colas said. “Perhaps the long wait for more normal capital markets is finally over.”

Morning MoneyBeat Daily Factoid: On this day in 1945, World War II came to an end after President Harry Truman announced Japan surrendered unconditionally.

-Steven Russolillo

STOCKS TO WATCH

Dow industrials component Cisco is expected to report fiscal fourth-quarter earnings of 51 cents a share on revenue of $12.41 billion, according to analysts surveyed by FactSet Research.

Macy’s is forecast to post earnings of 78 cents a share in the second quarter on revenue of $6.26 billion.

Deere is estimated to report a profit of $2.17 a share on revenue of $9.18 billion in the fiscal third quarter.

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